Difference between Liquidation, Bankruptcy and Insolvency

Liquidation refers to the process of winding up a company’s affairs, selling off its assets, and using the proceeds to pay off its debts. Once the assets are liquidated and creditors are paid, any remaining funds are distributed to shareholders. Liquidation leads to the dissolution of the company, meaning it ceases to exist as a legal entity. Liquidation can be voluntary, initiated by the company’s members or creditors, or compulsory, ordered by a court when the company is insolvent. It is typically undertaken when a company can no longer meet its financial obligations or has completed its purpose.

Bankruptcy

Bankruptcy is a legal process through which individuals or businesses that are unable to repay their outstanding debts can seek relief from some or all of their liabilities. It is a court-driven procedure, often initiated by the debtor, where assets are liquidated to repay creditors. In personal bankruptcy, the individual may be discharged from the obligation to repay certain debts, providing a fresh start financially. Businesses that file for bankruptcy may restructure or liquidate, depending on the type of bankruptcy filed (such as Chapter 7 or Chapter 11 in the U.S.).

Insolvency

Insolvency is a financial state in which an individual or company is unable to meet its debt obligations as they become due. It does not automatically lead to liquidation or bankruptcy but often results in those processes if the insolvency cannot be resolved through restructuring or negotiation with creditors. Insolvency can be temporary if the entity can secure additional funds or renegotiate terms with creditors, but it often leads to legal action, such as bankruptcy or liquidation, if the situation worsens.

Key differences between Liquidation, Bankruptcy and Insolvency